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A Higher Standard for Bank HR Departments (Part 4)

on Friday, 2 May 2014 in Banking Update

With an additional overlay of state and federal regulation, employment law issues at financial institutions take on an additional level of complexity. Whether it is the new regulations affecting permissible compensation practices for mortgage loan originators, state and federal licensing requirements or complex rules applicable to insider transactions, human resource professionals who work in financial services need to be attuned to the special rules that apply to employees and executives at their institutions.

This article is the fourth installment in a six-part series on banking regulations that impact your financial institution’s Human Resources Department. These materials originally were presented to attendees of 26th Annual Baird Holm Labor Law Forum.

Part 4: Selling Securities under Networking Arrangements

Financial institutions can provide their customers with a wide array of financial products and services through “networking arrangements”. This is where a financial institution enters into a written agreement with a registered broker-dealer for the provision of brokerage services to its customers. Non-deposit investment products (such as mutual funds, stocks, bonds, variable annuities, municipal bonds, mortgage-backed securities, or limited partnership interests) must be sold in compliance with both banking and securities law regulations, which impose specific requirements on both financial institutions and their employees.

In a standard networking arrangement, broker-dealers offer a range of investment products and services to a financial institution’s customers on the financial institution’s premises. In these arrangements, the financial institution makes available to the broker-dealer’s registered representatives, a working area on the premises, telephones and desk space. In return, the broker-dealer pays the financial institution a fee based on all securities transactions that occur at or are attributable to activities conducted on the financial institution’s premises. The broker-dealer employs or contracts with the registered representatives (individuals licensed to sell securities) and is fully responsible for all securities sales occurring through them.

Under many networking arrangements, registered representatives are dual employees of the financial institution and the broker-dealer. When the dual employee is providing investment products and services, the broker-dealer is responsible for monitoring the registered representative’s compliance with applicable securities laws and regulations. When the dual employee is providing bank products or services, the financial institution has the responsibility for monitoring the employee’s performance.

Management must provide a description of the responsibilities of those personnel authorized to sell non-deposit investment products as well as other personnel who may have contact with retail customers. The financial institution’s policies and procedures, as well as employee training materials, should carefully detail the activities restrictions and responsibilities that apply to dual employees. For example, dual employees should not, while located in routine deposit-taking areas (specifically teller windows), make general or specific recommendations regarding investment products, or accept any orders for such products.

Furthermore, employees that are not dual employees may not engage in any securities or investment related activities other than providing clerical and ministerial assistance unless an exception is met. This means nonregistered employees may not perform any of the following tasks:

  • Accept or deliver money or securities.
  • Recommend any security or give any form of investment advice.
  • Describe investment vehicles such as mutual funds.
  • Discuss the merits of any security or type of security with a customer.
  • Handle any question that might require familiarity with the securities industry or the exercise of judgment regarding securities and investment alternatives.
  • Take orders to execute securities transactions.

However, federal regulations permit nominal compensation (not more than $25 per referral) to be paid to financial institution employees who are not registered representatives but refer prospects to dual employees. The financial institution’s policies and procedures should designate, by title or name, the individuals responsible for supervising referral activities initiated by financial institution employees not authorized to sell investment products. They also should include standards pertaining to such customer referrals.

Part 5 >>

Jonathan J. Wegner

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500

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